Tag Archives: Currencies

Is the debt form of a claim on a financial asset better or is an equity form of claims on financial assets better to serve as a new form of currency for a sovereign community?

Before I get to answer that question, I would like to first clarify again that the word “derivative” has been grossly misunderstood and has been mis-used in the media, especially in recent times after the global financial crises had happened.

Generically speaking, the word means what it means. Anything that is derived from something else is a “derivative”. Therefore “money” is in fact the world’s first “financial derivative”. It helped people save the troubles associated with a bartering system to swap goods for goods, to swap services for services or to swap goods for services and vice versa.

Hence the economic utility of a “financial derivative” could easily be understood. It is simply an alternative form of a claim on an asset that may serve better as a medium to swap between claims on different goods or services.

There are different derivatives such as simple derivatives vs. complex derivatives just as there are different types of people, i.e. thin people vs. fat people or care-free persons vs. deep thinkers, etc. There are good derivatives vs. bad derivatives just like there are good cholesterol vs. bad cholesterol in our human bodies. There are also derivatives based on equity ownerships vs. derivatives based on loose credit claims just as there are glass-and-steel building built on rock solid foundations vs. tall buildings that were hastily erected on quick sand that may be doomed to collapse.

So to carry on the conversation we would first have to let in those who could distinguish between the intellectual academic meaning of financial derivatives to join the conversation and let out those derivatives-bashers in public media who do not care about knowledge based intellectual pursuits.

The point I wanted to make is not another defense of derivatives but is rather that yes indeed, a currency should in fact be considered a form of a claim and hence a form of “financial derivatives” on certain assets a sovereign community owns. However, that unfortunately has not been the case in our modern world. The paper currencies, regarded as legal tenders and issued by may countries are in fact, very vague on what they are backed by.

The second question is that whether a claim of the equity ownership of financial assets that a country owns is better and safer than a claim on a debt obligation either collateralized on some financial assets or simply on the country’s verbal promise of its ability to pay better and safer.

These will be the subjects that I would like to continue to work on in future blog posts here in the coming months, hopefully with the active participation from many of the SwapRent.com blog readers. I have also set up a new group on Linkedin under the title “TARELV. Please feel free to sign up and leave your comments there as well.

It is quite a amazing how the current Administration of our government has tried and almost accomplished the goal of brainwashing or duping the American public into believing a lower US Dollar value is good for us. They even got many financially illiterate politicians (Congressmen) to sing their tunes with them.

Try to imagine that your kid comes home back from school with a D on his report card, argues with you and tries to brainwash you that an F should be better so that he would be able to compete with other more diligent and industrious kids? Furthermore he complains that the rules need to be changed so that the other kids should not study hard and instead should be playing more like he does? He calls the bad grades on his report card a “manipulation” by those hard working kids. He even labels those industrious kids “Grade Manipulators”.

The simple truth is that a lower exchange rate would produce the immediate wholesale sell-off of a country’s wealth in the global marketplace, not increasing any genuine economic competitiveness. Economic competitiveness is produced through productivity and innovations, not by artificially altering exchange rate so that incompetent politicians could cosmetically buy some more time to hang on to their jobs a bit longer.

Competent governments in managing the country’s economy will be rewarded with a stronger currency and hence increased national wealth. Responsible and hardworking citizens under an incompetent government, on the other hand, will lose their personal wealth instantly in the global marketplace when their national currency is devaluated, no matter how hard they may have worked individually.

There is no quicker way to make the US lose its position as the No. 1 economy of the world and its associated super power status than de-valuating the US dollars. Foreigners with a stronger currency would then be able to buy our treasured assets in a fire sale. In addition, with a weak currency, the US would not be able to compete in the global marketplace to buy commodities such as crude oils, rare earth materials, gold, silver, platinum, food, crops, other raw materials etc. The cost to produce manufactured goods in America will be getting harder and harder as well as more and more costly. It will make the US lose even more economic competitiveness and get our country in a downward spinning vicious cycle. The list of the potential problems and disasters goes on and on …

Perhaps it is time that the parents sit down with their kids for a serious talk?

P.S. I made a keynote speech for ISDA’s Annual General Meeting held in Singapore back in March 2006 regarding the China’s role in the global financial market. In that speech I spoke about the exchange rate issues. The points are still quite valid. Here are the links to the presentation and the speech video.